This article was first published in the CFO Series Magazine in September 2020
An IRD audit is an examination of your financial affairs by the Inland Revenue Department, to ensure you’ve paid the right amount of tax and you’re complying with tax laws. An audit can be anywhere from a simple check of your GST registration to a comprehensive examination of business and personal records.
The Department could select you for an audit for a number of reasons. For example, the department’s analysts might have identified that information in your tax return is somewhat unusual or inconsistent with industry norms. The Department might have received a tip off that suggests your tax return is incorrect or could be investigating due to past compliance history. Or, it could simply be that the IRD is currently focused on your industry.
If you do find yourself in the unfortunate position of being selected for an audit, don’t worry, the worst consequence is probably the inconvenience. Below, we outline some tips on how to deal with the audit and IRD investigators throughout the process:
A visit from the IRD
The IRD may decide to visit your business premises without notice. Always ask for identification and take the investigators’ business cards.
Don’t answer any questions from an IRD investigator without seeking advice from a professional tax advisor. Take the investigators’ contact details and arrange a time to meet with them and your tax advisor.
Don’t allow the investigators to take any original documentation. Insist they make copies if they require the information.
Interviews with IRD investigators
It is strongly recommended that you do not attend interviews without a professional tax advisor. Being audited demands specialist expertise as it generally involves complex tax laws. For the best chances of successfully passing the audit, ensure representation from your tax advisor.
Ask the IRD in advance for a list of questions it wishes to raise. This provides opportunity for you to prepare the relevant information and seek professional advice.
Provide information promptly to demonstrate to your IRD investigator/s that you take tax compliance seriously. If you require more time, let the investigator/s know and negotiate a revised timeframe to provide the requested information.
Consider making a voluntary disclosure
If you become aware that you’ve filed an incorrect tax return, it’s best to front this early in the audit process. You can also make a voluntary disclosure ahead of a compliance review or audit. Ensure that you have complete information to make a disclosure and understand the likely costs associated with disclosure, such as interest, penalties and additional tax. One major advantage in making a voluntary disclosure is that any penalties will be reduced by 75% to 100% in some circumstances.
Consider using tax pooling
If you receive a notice of reassessment due to an IRD audit or voluntary disclosure, consider tax pooling to pay what you owe. The Department will apply surplus tax paid on the original due date against your tax liability when you pay via tax pooling. As such, this is treated as if you’d paid on time, eliminating any interest and late payment penalties.
An IRD approved provider can reduce the interest cost by up to 30% on any additional tax payable, resulting in considerable savings.
An IRD audit can be very expensive, especially if it takes a significant length of time and you’re seeking assistance from your expert tax advisor. For this reason, you might consider taking out audit insurance from the beginning so that in the event of an audit, you won’t find yourself in trouble financially.
Regardless of why you might be chosen for an audit, it’s important to ensure your records are up to date, you aren’t providing any false or misleading information, and you maintain a positive compliance history. This way, you’re unlikely to owe any money after an audit and less likely to be selected.
Avoiding tax obligations is a serious offence that can result in severe penalties. Any additional tax obligations arising from an IRD audit is subject to use of money interest (UOMI) and shortfall penalties, which range from anywhere between 20% to 150% of the tax shortfall and are levied according to the seriousness of the offence. The IRD may, in extreme circumstances, consider a criminal prosecution.
By seeking advice from a William Buck tax specialist, you’re giving yourself the best chance at successfully passing the audit, or, where tax avoidance has occurred, receiving the best possible outcome. We will liaise directly with the IRD on your behalf, explaining to you along the way the matter being investigated, the relevant facts, outcomes and implications.